Annual bond volume projections revised higher amid issuance onslaught, mega deals
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Favorable market conditions, a general acceptance of rates staying higher for longer and growing uncertainty ahead of the November election have led state and local government issuers to bring more debt than anticipated and in much larger deals to market so far in 2024, a welcomed trend after two paltry years of issuance.
Total volume currently stands at $224.13 billion, up 38.5% from $161.848 billion at this time last year. As the end of the first half approaches, several firms are revisiting their supply projections for the year, given the growth so far this year.
Most of the firms The Bond Buyer spoke to in December believed issuance would surpass
Few predicted the
This has led to a narrower range of issuance forecasts as the firms now see volume landing within a range of a high of $460 million from BofA Global Research and CreditSights to a low of $385 billion to $405 billion from Janney, though no firms expect issuance to
BofA Global Research strategists revised their 2024 issuance projections in early April to $460 billion from $400 billion following the first quarter’s “surprisingly strong primary market.” BofA reaffirmed that projection in a mid-June report, as issuance for the first half of the year is set to rise above $240 billion.
BofA sees new-money totaling $325 billion, up 8% from its original forecast, as long-term needs for infrastructure and improvement, coupled with federal stimulus funds “drying up,” necessitate state and local governments to step up new financing issuance.
“The large decline in tax-exempt rates since the end of October 2023, and the remarkable stability of tax-exempt rates in 1Q24, clearly added to the positive factors that issuers are looking for,” BofA strategists said.
Meanwhile, refundings will total $135 billion, up 35% from the initial forecast, they noted.
The “larger-than-expected refunding volume” in Q124 benefited from low and stable tax-exempt muni rates, according to BofA strategists.
Additionally, the “pool of refunding candidates is significantly higher this year than in 2023 as higher tax-exempt rates in 2022-2023 hampered refunding activities,” they said.
Issuance in the second half of the year is historically higher than the first half during non-election years. However, in an election year, issuance in 2H is lower than 1H outside of 2020.
So while issuance is expected to slow in 2H24 — and possibly come “short” of BofA’s initial $243 billion prediction — volume for 2024 could still reach or exceed $460 billion.
CreditSights has also revised its initial issuance forecast upward.
Volume stood at $191.353 billion through the end of May, up 33.5% from 2023, suggesting that issuance for 2024 could reach $515 billion if the current pace continues, said Pat Luby, head of municipal strategy at CreditSights.
However, he said issuance will slow down during the remainder of the year leading CreditSights to raise its projection of issuance to $460 billion from $400 billion.
Many market participants believed at the start of the year the Fed would start cutting rates in March, giving issuers “flexibility” when they came to market to try to “time the market,” Luby said.
However, with the Fed still holding rates steady and the fiscal year approaching for most states, some issuers waiting on the sidelines have opted to proceed and “lock in their financing costs before they close their books at the end of their year,” he said.
The “year-end closing of the books” is one reason July has fallen by an average of 20% from June over the past 10 years, Luby said.
New issuance historically picks up after Labor Day, with October seeing the highest monthly average of volume over the last 10 years, he noted.
Due to the election, the fall calendar will get a “fast start” in early September before “tapering” around mid-October, Luby said.
Ramirez updated its supply forecast for 2024 by an additional $75 billion, resulting in a total $450 billion forecast from the original 2024 projection of $375 billion, said Peter Block, managing director of credit strategy at the firm.
The estimate averages $37 billion per month for the remainder of the year, he said.
The revision reflects a 25% increase year-over-year in new money, which stands now at an estimated $389 billion, driven by “pent-up capital needs, inflation, and full recognition by issuers of higher for longer rates,” Block said.
The firm previously raised the estimated total refunding volume in March 2024 by approximately 13%, or $9 billion, to $61 billion. This was due to a “slightly more favorable landscape” for refundings of BABs by tax-exempts, he noted.
Barclays has also revised its 2024 issuance prediction upward to $430 billion to $450 billion from $400 billion to $420 billion. This excludes $7 billion to $12 billion of corporate CUSIPs.
New-money remains at an estimated $310 billion to $330 billion, while refundings have risen to $110 billion to $130 billion, up from the initial estimate of $80 billion to $100 billion, they said.
For the latter, the revision comes mostly due to an expected pick-up in BAB refundings, according to Barclays strategists.
Following a “slow” start in January and February, issuance “surprised to the upside,” with several months seeing issuance fall between $35 billion and $45 billion, Barclays strategists noted.
Issuance is usually heavier in the second half of the year than in the first half. However, in the lead-up to presidential elections, issuance is typically front-loaded to the beginning of the year as many issuers tend to “stay away from the market” in Q4, which often sees “high levels of volatility,” they said.
Since 2004, issuance has been higher in the first half of all presidential election years, except for 2020, Barclays strategists said.
This pattern will continue in 2024, with November and December seeing significantly lower issuance, leading Barclays to increase its forecast by only 7%.
HilltopSecurities raised its 2024 issuance forecast upward at the end of January to $420 billion from $330 billion, said Tom Kozlik, managing director and head of public policy and municipal strategy at the firm.
This results in a projected average of $35 billion a month, up from $32 billion a month, he said.
This January revision, which still stands as of mid-June, is due to “vastly improved” macroeconomic expectations, Kozlik noted.
HilltopSecurities’ original forecast in November 2023 was thought to be on the “optimistic side,” as the firm believed “the economy would not fall into a recession and growth would slightly remain positive,” he said.
However, since then, growth expectations have improved for 2024, with the fourth quarter GDP result contributing to the firm’s revision, according to Kozlik.
Some market participants opted against revising their predictions.
Matt Fabian, a partner at Municipal Market Analytics, kept his original issuance projection at $425 billion to $450 billion for 2024.
Originally on the “high side,” he credited his original projection decision to lower than typical issuance in the last couple of years.
State and local governments were likely “preoccupied” with federal grants and funding programs, resulting in an overdue build-up of issuance, according to Fabian.
He estimates that 2024 will be a year of “rebound” issuances, and attributes the current surge of issuance to uncertainty prior to the presidential election, with volume set to slow down as November approaches.
Additionally, Wells Fargo believes municipal supply for 2024 is likely to be in line with its initial projection of $425 billion, said Vikram Rai, head of municipal strategy. However, he noted volume could “surprise” to the upside to $450 billion.
Pent-up demand, recession fears, conditioning, the upcoming elections, and inflation are helping to increase issuance in 2024 following a lower-than-expected volume in 2023 due to several factors, including “tremendous” rate volatility, he said.
As of June 17, weekly issuance would need to be about $7.35 billion to meet Wells Fargo’s target of $425 billion, though he noted “issuance is likely to be lumpy with above-average issuance until November after which issuance is likely to drop.”
Alice Cheng, a municipal credit analyst at Janney Montgomery did not revise her initial issuance prediction — which sees volume rising to $385 billion to $405 billion in 2024 — due to her expectation that issuance will fall off sharply amid the election year.
During the 2020 election, volume dropped 34% in November and December, and in 2016, issuance fell 36% over the same time period, she noted.
While each month has seen gains year-over-year —
The timing of rate cuts, along with the 2024 elections, is also creating some “confusion” and volatility in issuance, she said,
Refundings may tick up slightly from her original forecast but not meaningfully, according to Cheng.
The predicted surge of BAB refundings through ERPs has been tempered due to ongoing controversy and
